TRANSCEND MT SERVICES PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

The Appellant, M/s. Transcend MT Services Pvt. Ltd. (formerly known as Heartland Information and Consultancy Services Pvt. Ltd.)(in relation to Heartland Bangalore Transcription and Services Pvt. Ltd. (HDTS)) (hereinafter referred to as ‘the taxpayer - HDTS’) by filing the present appeal being sought to set aside the impugned order dated 31.05.2013, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2006-07 on the grounds inter alia that :-

Briefly stated the facts necessary for adjudication of the controversy at hand are : erstwhile Heartland Bangalore Transcription and Services Private Limited (HBTS), the taxpayer – HBTS was amalgamated with the Heartland Information and Consultancy Services Private Ltd. (HICS) w.e.f. April 1, 2008. So, the taxpayer - HBTS ceased to exist w.e.f 01.04.2008. Then the name of HICS was changed to M/s. Transcend MT Services Private Limited (TMTSPL).

The taxpayer – HBTS is a subsidiary of Heartland Asia (Mauritius) Limited with 99.99% of shareholding by Heartland Asia (Mauritius) Limited and 0.01% held by HCR Information Corporation USA. The taxpayer - HBTS is 100% export oriented unit registered under Software Technology Park Scheme (STP) of Department of Electronics, Government of India. The taxpayer - HBTS is into IT Enabled Back Office Medical Transcription services as part of its business operation, providing medical transcription services exclusively to HCR Information Corporation USA, the ultimate holding company of The taxpayer - HBTS.

During the year under assessment, assessee entered into international transactions with its Associated Enterprises as under:-

The taxpayer - HBTS in order to benchmark its international transaction in its TP study selected Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) as its Profit Level Indicator (PLI) (Operating Profit / Total Cost) at 10%.

The taxpayer - HBTS in its TP study after selecting 20 comparables used weighted average margin of three years to arrive at the conclusion that the international transaction arrived at by the assessee with its Associated Enterprise (AE) at is arm’s length.

However, pursuant to the directions issued by the ld. DRP, TPO passed fresh order dated 22.12.2009 and calculated the margin of final list of comparables as under :-

Ld. TPO on the basis of his own analysis calculated the PLI for 13 comparables at 22.11% as against PLI of assessee at 10% and proceeded to compute the ALP as under :-

The taxpayer carried the matter by way of raising objections before the ld. DRP, which have been disposed off. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeals.

We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

Grounds No.1.1.1, 1.1.2 & 1.1.5 need no findings being general in nature and having not been pressed by the ld. AR for the taxpayer.

Undisputedly, the TNMM as the Most Appropriate Method (MAM) based on OP/TC as the PLI applied by the assessee has been accepted by the TPO. It is also not in dispute that the TPO accepted the FAR characterization of the taxpayer. Out of 20 comparables chosen by the taxpayer, the ld. TPO rejected 13 comparables being functionally dissimilar, list of final set of comparables is as under :-

Ld. TPO computed the average PLI of the final 13 comparables selected for the international transactions at 22.30% as against PLI of the assessee at 10% and proceeded to compute the ALP of the international transactions as under :-

The taxpayer taken weighted average because during TP study, data was not available, but during TP proceedings when the data got available average was calculated on the basis of current year’s data. Pursuant to the direction issued by ld. DRP, the TPO passed fresh TP order dated 25.04.2013 by computing the correct margin of the comparables as under :-

Ld. DR relied upon the order of the TPO.

Now, in order to cut short the controversy at hand, the ld. AR for the assessee sought to exclude three comparables viz.

Annual report and balance sheet of Vishal as on 31.0.2007, available at pages 579 to 586 of the paper book, shows that Vishal has the employee cost to sales ratio of 2% for FY 2005-06 vis-à-vis taxpayer which is at 67.57%. This fact goes to prove that Vishal outsourced its substantive work to third party vendors which make it functionally dissimilar.

Furthermore Vishal is into the business of Knowledge Process Outsourcing (KPO) as it provides services of data conversion, microfilming and microfilm scanning, data and document management, data processing, digital library management, etc. From the website extract brought on record by the taxpayer, available at page 412 of the paper book, it has also come on record that Vishal is into print on demand services and as such, is not comparable with the taxpayer.

Hon’ble Delhi High Court in Rampgreen Solutions (P.) Ltd. vs. CIT – (2015) 377 ITR 533 (Delhi), while examining the comparability of Vishal with Rampgreen Solutions (P.) Ltd., a similarly situated ITES provider to its AE, ordered to exclude Vishal on ground of expenditure on employment cost as it was a small fraction of proportionate cost incurred by the assessee and on the ground that Vishal used to outsourced most of its work from vendors and service providers.

Vishal has been excluded as a comparable for benchmarking the international transactions in taxpayer’s own case for AY 2005- 06 in available at pages 11 & 12, on ground of different business model as well as functional dissimilarity. So, we are of the considered view that Vishal is not a suitable comparable for benchmarking the international transaction entered into by the taxpayer with its AE for AY 2006-07.

The taxpayer sought to exclude Nucleus from the final set of comparables for benchmarking its international transaction with its AE on the grounds inter alia that Nucleus has undergone extra ordinary event of amalgamation and merger during the relevant financial year; that it is outsourcing most of its work; that Nucleus is a high profit earning company with margin of 36.63% and that calculation of PLI of Nucleus by the TPO is also erroneous as 45.07% as against correct margin by excluding leave and licence fee at 36.63% and relied upon the decisions of Ameriprise India (P.) Ltd. vs. DCIT – (2015) 67 SOT 136 (Delhi – Trib.), American Express (India) (P.) Ltd. vs. DCIT – (2016) 177 TTJ 33 (Delhi – Trib.) and HSBC Electronic Data Processing India Ltd. vs. ACIT in ITA No.1624/Hyd./2010 for AY 2006-07.

The taxpayer has brought on record the annual report of Nucleus, available at page 391, which shows that in accordance with the scheme of amalgamation as detailed in Director’s report of assets and liabilities of the erstwhile Nucleus have been transferred to and vested in the company w.e.f. 01.04.2005. Consequently, result for the year ending 31.03.2006 includes the result of erstwhile NNGIS and are not comparable with those of the previous year ending 31.03.2005.

Furthermore Nucleus outsources most of its work/services to other vendors / service providers. Coordinate Bench of the Tribunal examined the comparability in Ameriprise India (P) Ltd. and American Express (India)(P.) Ltd. (supra), available at page 52 of the case laws paper book, wherein Nucleus has been ordered to be excluded as a comparable vis-à-vis Ameriprise India (P) Ltd. which is also a captive contract service provider engaged in IT Enabled Back Office service on ground of amalgamation by following M/s. HSBC Electronic Data Processing India Ltd. (supra) and Pr. CIT vs. IHG IT Services (India) Pvt. Ltd. in of 2016 (Hon’ble Punjab & Haryana High Court). Hon’ble Punjab & Haryana High Curt in IHG IT Services (India) Pvt. Ltd. (supra) ordered to exclude Nucleus from the final set of comparables vis-à-vis IHG IT Services on ground of outsourcing of its work by making following observations :-

So, we are of the considered view that because of amalgamation and outsourcing most of its work, the Nucleus cannot be a suitable comparable vis-à-vis the taxpayer for benchmarking the international transaction. AO/TPO is directed to recompute the margin accordingly.

Perusal of the relevant page of annual report, available at pages 689 & 690, the taxpayer has RPT to the tune of RS.14,48,17,710/- in FY 2005-06 as against total sale of Rs.23,70,09,469/- which is 61.86%. Furthermore from the perusal of relevant page of the annual report available at page 60 of the compilation explains the functional profile of Tricom as, “Technology Absorption and Research & Development : Your company develops software to provide efficient Business Process Outsourcing services to its customers. The systems team of your company does continuous research and development for up gradation of the software in order to provide better services to its clientele. Your Company also develops software products to process the data required for providing BPO services to its customers. Your Company takes efforts to adapt latest technology and techniques, which helps it to be in competition.”

Coordinate Bench of the Tribunal in ITO vs. Business Process Outsourcing India (P.) Ltd. – (2014) 61 SOT 83 (Bangalore – Trib.) examined the comparability of Tricom vis-a- vis the assessee company ordered to exclude the same on ground of the fact that Tricom develops its own software whereas the assessee has no such software product intangibles. So, keeping in view the RPT of 61.86% and the fact that Tricom develops its own software product and own its own intangibles, it cannot be a suitable comparables vis-à-vis the taxpayer. So, we order to exclude the same. So, in view of the matter, grounds no.1, 1.1.3, 1.1.4, 1.1.6, 1.1.10 and 1.1.11 are determined in favour of the taxpayer GROUNDS NO.1.1.7 & 1.1.8 IN &

The ld. AR for the taxpayer contended that while comparing the margin earned by the comparable company vis-à-vis the taxpayer itself on account of working capital employed should also be factored into. Ld. TPO/DRP have not granted comparability adjustment on account of difference in working capital requirement, risk assumed by the taxpayer vis-à-vis comparable company and in ignoring the quantification of aforesaid adjustment for such differences. Issue as to the working capital adjustment has been examined by the coordinate Bench of the Tribunal in assessee’s own case for AY 2005-06 (supra) in taxpayer’s own case for AY 2005-06.

The ld. CIT (A) has granted working capital adjustment to the taxpayer in AY 2005-06 which order has been upheld by the coordinate Bench of the Tribunal by following the decision rendered by Bangalore Bench of the Tribunal in in TNT India Pvt. Ltd. vs. ACIT. So, following the decisions rendered by the coordinate Bench of the Tribunal in taxpayer’s own case for AY 2005-06, we are of the considered view that the taxpayer is entitled for working capital adjustment qua margin earned by the comparable companies vis-à- vis the taxpayer.

However, during the course of argument, the ld. AR for the taxpayer contended that in case aforesaid three comparables viz.

The ld. AR for the taxpayer further contended that the ld. DRP has not followed the order of the Tribunal passed in the first round of litigation in taxpayer’s own case as to the applicability of proviso to section 92C (2) of the Act.

Coordinate Bench of the Tribunal in taxpayer’s own case in first round of litigation qua AY 2006-07 in order dated 30.06.2011 has applied the proviso to section 92C (2) in favour of the taxpayer by returning following findings :-

When the issue as to the allowability to the taxpayer for 5% of adjustment has already been decided in favour of the taxpayer in first round of litigation and the matter was remanded on specific issues, the ld. DRP was under legal obligation to provide the benefit of proviso to section 92C(2) of the Act to the taxpayer. For ready reference, operative part of order passed by the coordinate Bench of the Tribunal in assessee’s own case in in first round of litigation in AY 2006-07 is reproduced for ready perusal as under :-

Ground No.1.1.9 in both the aforesaid appeals need no specific findings being general in nature and having not been pressed.

The taxpayer has raised objection before ld. DRP as to disallowing deduction u/s 10A by the AO which was disposed off by the ld. DRP in favour of the taxpayer by returning following findings :-

Since DRP has given categoric direction to the AO to allow deduction to the taxpayer u/s 10A, the AO was under judicial discipline to carry out the deductions. So, the AO is directed to comply with the directions issued by ld. DRP. Consequently, Ground No.2.1 is determined in favour of the taxpayer.

AO is directed to examine the credit of taxes of Rs.82,00,000/- already paid by the taxpayer in accordance with the demand raised by the AO vide notice dated 27.10.2010 for the year under assessment and allow the same after due verification of the facts.

The ld. AR for the taxpayer contended that this issue has already been decided in favour of the taxpayer in its own case for AY 2006-07 in ITA No.2136/Del/2014. Perusal of the order passed by the coordinate Bench in (supra) shows that identical issue was raised and has been decided in favour of the taxpayer by returning the following findings :-

Keeping in view the fact that this is a second round of litigation and in this case also, original assessment was completed on 27.10.2010 and as such, issue is entirely covered in favour of the taxpayer. So, the AO is directed to charge the interest u/s 220 of the Act by following the findings returned by the coordinate Bench of the Tribunal in (supra) after due verification.

Ground No.2 in and Ground No.4 in are general in nature and do not require any adjudication.

Ground No.3 in and Grounds No.3 & 5 in 234B of the Act need no specific finding being consequential in nature.

Resultantly, both the appeals filed by the assessee are allowed. Order pronounced in open court on this 12th day of December, 2017.